The Tidal Wave – Investing in One Lesson

Becoming financially independent by investing in the stock market, mutual funds or real estate is not an easy task. Indeed, it is an uphill battle for most investors who are not suited to the rigors of market discipline.

You are probably familiar with Forbes magazine’s annual survey of “The Richest People in America,” known as the Forbes 400. Many analysts have misinterpreted the findings of the Forbes 400, often stating that the majority of rich people made their fortunes in real estate. But this is not the case. The majority of the Forbes wealthy did not get there by investing in real estate, or by investing in the stock market, for that matter. According to the most recent survey, only 72 out of the 400 on the list were real estate investors, and even that can be misleading. Many of them made their original fortunes in other areas, and then diversified into investment properties. Others inherited their real estate.

The fact is that the single most popular way to riches was not real estate, not the stock market, not mutual funds – in fact, it was not “investing” at all. The most common path to financial independence was through one’s own business! Whether it was manufacturing, automobiles, department stores, commercial banks, shipping, insurance, computers or one’s own profession, the Forbes 400 made it primarily through creating and developing their own businesses.

Moreover, according to several recent Wall Street Journal articles, numerous retirees actually lose their fortunes after they sell their lifetime businesses and become investors.

How should these facts affect your attitude toward investing? Let’s look at several modern-day examples.

How do you make a million dollars in today’s financial world?

THE REAL WINNERS IN THE STOCK MARKET

Well, you don’t become a millionaire by investing in the stock market. You make it by being a stockbroker, or better yet, by starting your own brokerage house. That way you earn a commission on every trade whether your customers are buying or selling, whether they are making a profit or a loss.

You don’t make a million dollars by buying penny stocks. You make a million by selling penny stocks, not as an investor, but as a penny-stock broker. The penny brokers are the principal ones making a killing in the penny stock business, not the naive investor. The commissions are huge in the penny stock business.

Buying new issues is not a secure way to make a fortune. But “going public” is an excellent way for a businessman to increase his net worth by a million or two, letting other investors share in his risks. Selling new public stock can be extremely profitable for the corporate president, company directors, the underwriters and other founders who are given the opportunity to buy “insiders’ stock” at 30 cents on the dollar of the new issue price. There are risks, of course, but the risks are lower than those taken by the retail customer who pays the full new-issue price. And if the stock is “hot,” the premium price can sometimes jump to two or three times the official new-issue price before the average investor gets in. The retail customer is usually the last man on the totem pole to make any money.

You don’t become a millionaire by investing in a mutual fund. You make a million by starting your own mutual fund, which is probably the fastest growing area of investing today. In the early 1980s, there were only 400 mutual funds. Today there are over 1,400. Why the rush? Passive investors want an easy way to participate in a bull market and want to rely on expert, professional advice. The management fees on these funds can be very lucrative. Many mutual fund managers make half a million a year, or more. And, remember, the money manager makes that kind of money whether the fund is performing well or not. (Granted, the money manager makes more money if the fund is a superior performer, but still the fees can be substantial, even in a down market.)

Very few investors make a fortune trading commodities. But commissions mount up for the floor trader in Chicago, the commodity broker in New York, or the commodity pool manager in Dallas. Trading commodities is high risk, but selling commodity contracts (short or long) is the low-risk way to make a million.

RARE PROFITS IN RARE COINS

How many private investors really maize a million buying and selling rare coins? Not many, unless they are rare coin dealers! The average markup on numismatic gold and silver coins is 22%. That’s quite an incentive for the casual businessman to get into numismatics. It also means that a coin buyer has to recoup 22% just to break even. So, even in a bull market, it may take a year to make a profit. And that’s assuming the grading of the coin is accurate. The chances of getting an over-graded coin are increasing, because in any market where there’s greed and lack of information, the fraud peddlers enter. Many coin dealers are going to be reluctant to buy your “MS 65″ gold coin when an “MS 60″ (also uncirculated) sells for one-third the price. The industry is already distinguishing between “technical grade” (trade standards) and “commercial grade” (retail standards), so you know trouble is brewing. Once again, my feeling is that the low-risk, big money is being made by the coin dealers, not the investors.

The classic example of malting consistently high profits has been in the insurance industry. You don’t become a millionaire by purchasing a whole life policy (unless the person you insured dies!), but you can make a million as an aggressive insurance salesman. The old traditional life returned on average 3% on a customer’s cash-value investment, while the insurance broker received 100% commissions on first-year premiums, with additional payments down the road. Today, of course, insurance products have become a much better deal for consumers, especially single-premium whole-life policies.

IS REAL ESTATE THE ANSWER?

Surely, you say, if there’s one area where the individual investor can make a million, it’s in real estate. It’s ideal for the “cash poor” investor, right? Admittedly, one can point to many success stories in real estate investing. I’ve met quite a number of successful real estate investors. But, looking at the overall picture, I can only conclude that it’s a small minority of real estate seminar graduates who become financially independent through real estate. You want to make a lot of money in real estate? The best way is to become a real estate agent, financier or developer! The real estate agent gets his commission, whether buying or selling, and he is sure to be one of the first to hear about the bargains (distressed deals).

The commercial banks, savings and loans, and financial lenders make the real money in real estate by collecting 2-3 points on every mortgage or refinancing, plus high interest rates on 30-year mortgages (the longer the term, the greater their profit). The vast majority of homeowners pay regularly like clockwork. The banks and financial institutions are the real money machines. Want to make money in real estate? Become a banker or financial lender.

Real estate developers take a chance, and many struggle to find buyers. But they also reap high profits. Recently an associate of mine bought a beach condo on the West Coast of Florida. He paid $140,000, and expects it to be worth $250,000 in a few years. But in my opinion the real winner was the condo developer and broker who sold him the condo. He probably doubled or tripled his investment, and his profits are secure, whether the value of the condo rises or falls a year from now.

The ultimate money-maker for the real estate developer has been time shares, where individual units are sold at huge premiums compared to the total cost of the units. Time shares are often touted as an investment, but they have yet to develop a secondary market, and customers are frequently disillusioned with the time-share concept after it’s too late.

Many investors are interested in the profit potential of foreign investments. But if you want to make a million dollars investing overseas, a better alternative would be to own a foreign bank or brokerage firm, or to become a financial intermediary for interested investors. In the 1970s, during the bull market for gold, silver and Swiss francs, a financial firm in British Columbia used to advertise its services, complete with an 800 number, to American investors who wanted to open Swiss accounts. The financial company received a commission from the Swiss bank and also received a percentage of future paper profits from the investor (but wisely did not participate in losses). The firm took in several million dollars during the 1970s, even though investors could have gone to the Swiss bank directly without having to pay any fees or profit-sharing. Many Swiss accounts were never really managed – they amounted to a simple silver bullion account.

WHAT IS THE LESSON?

What am I suggesting? Am I saying that you should go out and become a stockbroker, a coin dealer or real estate developer? Certainly, that is one alternative which could make you financially successful.

But that’s not really what I’m saying. What I mean by this exercise is this: if you want to be a successful investor, you have to give it the attention of your fu11-time business!

You can’t be a passive investor and expect to make consistent profits. Why have you been successful in your full-time business, and able to accumulate surplus funds? Because you concentrated on doing things right. You took the necessary time to educate yourself, to research ways to become more proficient in your job or business. You got involved. You relied on the expertise of’ others, but you didn’t let them do your job. They helped you, but they didn’t take over your work. You spent hours, often overtime, to make sure that you understood everything and that you accomplished your tasks.

That’s the same attitude you need when it comes to investing. You can make money in the stock market, penny stocks and rare coins, but only if you take the time and money necessary to learn what it’s all about. Learn all about the fundamentals of a public company – earnings, profits and potential for growth. Check the technical chart patterns. Establish “stop loss” positions when you invest. You’ll undoubtedly make mistakes, but you will learn from those mistakes and become better at it, just as you did in your business. You can make money buying and selling rare coins, for example, but only if you learn all you can about grading, scarcity, auctions, coin shows and supply and demand factors. You can make millions investing in real estate, but only if you know as much as possible about real estate in your area, where to look for bargains, how to negotiate to your advantage, when to sell, what the tax breaks are, and so on.

In every investment area, you must recognize how to tell whether the deal is good for you and not just for the salesman. That is the key. Most importantly, get a grasp of local, national and world economic trends in the investment markets you’re interested in. Follow the trends for inflation, interest rates, and economic policy – they will have an impact on your investment decisions.

You might say, “You’re right, Mr. Skousen, but I’m too busy in my own business to take on another full-time business of investing. I’d rather rely on a professional money manager.” In that case, my response is this: If you feel you can’t take the time in investigate an investment area thoroughly, don’t get involved. Stay only with areas you are familiar with or are willing to learn about. If that means bank CDs, money market funds, and a few pieces of real estate, so be it. I would hope, of course, that you would be willing to learn about some of the exciting investment alternatives on the market today. Certainly there are plenty to choose from! Select the ones you are interested in, the ones you sense an ability to profit in, and get going. Subscribe to newsletters, read books, attend conferences, seek advice and start trading. Believe me, you’ll be better off.

Remember the lesson: Invest as though it were your full-time business, or don’t invest at all!

Jo Ann Skousen’s Odds & Trends

Movie reviews, theater reviews, and commentaries by Jo Ann Skousen, author, editor, professor and Mark's wife of 41 years. She is the Festival Director for the Anthem Libertarian Film Festival and the entertainment editor for Liberty Magazine.

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